Q

Q

What is a life insurance policy lapse?

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A

When you stop paying premiums on your life insurance, your policy will lapse and you’ll lose your life insurance coverage.

Nupur Gambhir

Nupur Gambhir

Published October 14, 2020

KEY TAKEAWAYS

  • Your life insurance coverage will lapse if you stop paying your premiums

  • Insurers offer a grace period of 30 days that prevents your policy from lapsing immediately after the first missed payment

  • It’s possible to reinstate your policy after the grace period, but you may be subject to additional fees and new underwriting

  • During the COVID-19 pandemic, life insurance companies have extended grace periods ranging from 60 to 90 days

When you take out a life insurance policy, you agree to pay either a monthly or annual premium to keep the policy active. If, for whatever reason, you stop paying those premiums, your policy will lapse and you lose your life insurance coverage.

Fortunately, a life insurance policy lapse won’t happen immediately after one missed payment. All life insurance companies have a grace period, usually around 30 days, which allows your policy to stay in force temporarily and gives you a buffer if you need to make a late payment. And during the outbreak of COVID-19, some insurers are extending their grace periods up to 60 or 90 days. You’ll need to resume payments before the end of the grace period to avoid terminating your coverage.

What does a life insurance policy lapse mean?

When your life insurance policy lapses, it is no longer active. Because you no longer have life insurance coverage, if you die your beneficiaries won’t receive a payout from the life insurance company.

What causes a life insurance policy lapse?

It’s easy to miss a single premium payment: maybe your address or banking information changed, and you forgot to let your insurance company know. Or maybe your life insurance policy doesn’t fit into your budget anymore. Whatever the reason, your policy will stay active after one missed payment thanks to the insurance company’s grace period. However, if you don’t make a payment after your policy’s grace period has ended, your policy will lapse.

How the grace period works

Every state’s department of insurance requires life insurance companies to provide a grace period when a premium payment is late or missed. That grace period is usually 30 or 31 days (but varies for each life insurance company) and begins the day that a payment is due and isn’t received.

During the grace period, you’re still fully covered by your policy, meaning that if you were to die during this time, your insurance company would still pay out the death benefit to your beneficiaries. But if you want to keep your coverage, you’ll need to pay your missed premium before the grace period ends. Depending on your insurer’s guidelines, you may also have to pay a late fee.

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The grace period during COVID-19

During the current coronavirus outbreak life insurance companies are offering an extended grace period of 60-90 days for people experiencing financial hardship or unemployment. While some insurers are automatically extending the length of their grace periods, others require a phone call or proof of financial difficulty. If you need some extra time to make a payment, make sure to contact your life insurance company to explain your situation and see what their grace period is.

Term life insurance policy lapses

If you’re the owner of a term life insurance policy and you haven’t paid your premium by the end of your insurer’s grace period, your policy will lapse and you’ll lose your life insurance coverage. If you die after your policy has lapsed, your beneficiaries won’t receive the death benefit, no matter how much you’ve previously paid in premiums.

Cash value life insurance policy lapses

Most cash value life insurance policies, such as whole life insurance, include a feature called automatic premium loan. This simply means that your insurer will use your policy’s cash value to pay your premium if you miss a payment and the grace period ends.

However, if there isn’t enough cash value built up to cover your premiums — or if it’s depleted by continued non-payment — your policy will lapse.

With any type of life insurance, your insurer is required by law to inform you when your policy is in danger of lapsing, and then again when it has officially lapsed, so you should receive multiple notices if you’re about to lose coverage.

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Can you reinstate a lapsed life insurance policy?

If you still haven’t paid your premiums by the time your insurance company’s grace period ends and you no longer have life insurance coverage, you may have the option to reinstate your life insurance policy that has lapsed. You’ll have to contact your insurer to reinstate your policy — and the process for reinstatement varies for each life insurance company. Typically, life insurance companies allow you to reinstate your coverage within two years of a policy lapse. The sooner you contact your insurer to reinstate your life insurance policy, the higher the likelihood that you’ll be able to.

“Each carrier tends to have different guidelines for reinstating policies, and reinstatement is often a case-by-case basis depending on the situation,” says Patrick Hanzel, Advanced Planning Specialist and Certified Financial Planner at Policygenius. “Applying for reinstatement of a policy might involve signing a document stating that your health has not changed. Also, you will need to pay backdated premiums to the date that the policy lapsed.”

As mentioned above, reinstating your policy is not as simple as making a phone call and asking for coverage again. You will likely have to prove your evidence of insurability, pay back premiums with interest, and undergo a new contestability period.

Depending on your insurer, reinstating your life insurance policy might also require new underwriting. Insurers will evaluate how long ago your policy lapsed and whether you had any red flags in your medical history when you first applied for life insurance. Some companies won’t require new underwriting if the policy has been inactive for less than 6 months; others may require only a limited underwriting process.

Whether or not you should reinstate your life insurance policy depends on your situation. On one hand, your rates are likely to be higher if you apply for a new life insurance policy because the cost of life insurance increases with age and any new medical conditions. You’ll also be able to get coverage quicker than you would if you went through a completely new underwriting process. However, you may have to pay to go through the underwriting process again and you’ll likely have to pay back any premiums you missed with additional fees, which may make purchasing a new life insurance policy more affordable.

Take a look at how insurance premiums increase with age.

How to avoid a life insurance policy lapse

There are a few simple steps that can help you avoid missing a premium payment and jeopardizing your life insurance coverage:

Enroll in automated payments

Most life insurance companies offer automatic bank drafts for payments. Since life insurance probably isn’t the first thing on your mind every month, automating your premium payments can help you stay on top of them.

You can also consider switching your payments from monthly to annual. Paying annually can reduce the hassle of having to remember to make a monthly payment. Furthermore, most insurance companies offer a discount — usually up to 5% for policies offered by Policygenius partner insurers — for paying annually instead of monthly.

But the most important thing, of course, is paying on time, so be sure to choose the payment method that fits your budget best.

Add a waiver of premium rider to your policy

Most life insurance companies offer a waiver of premium rider — also called a disability income rider — that exempts you from paying premiums if you incur a serious disability and can’t work.

The waiver of premium rider allows you to keep your existing insurance policy even if you lose your income due to disability. However, waiver of premium riders are often costly and difficult to qualify for.

Communicate with your beneficiary

If you’re having trouble paying your premiums, consider asking someone you trust to help cover the costs. Of course, in many cases, your beneficiary won’t be in a position to help, but if they are, then it’s worth asking them rather than risking a policy lapse. After all, the life insurance policy is in place to create a financial safety net for them.

Get no-lapse life insurance

If you don’t have a stable income, you might consider single premium life insurance. These policies only require one single premium payment for coverage that lasts your whole life and has a cash value you can borrow from. The caveat is that the single premium you pay is fairly expensive for one lump sum — anywhere from $5,000 to $10,000.

Due to its high cost, single premium life insurance should be your last insurance against a policy lapse. But if you can afford the high cost now and worry that you may not be able to pay your premiums in the future, it can ensure the protection of your beneficiaries regardless of your financial status.

FAQ

What happens if you let your life insurance payments lapse?

If your life insurance policy lapses, then you no longer have coverage and your beneficiaries won’t get a payout from the life insurance company when you die.

Can you get money back from a lapsed life insurance policy?

If you stop paying your life insurance premiums and your policy lapses, you are not refunded any of the money you paid in premiums.

Can a lapsed life insurance policy be reinstated?

Depending on your insurer, you may be able to reinstate a lapsed life insurance policy within a certain timeframe. This may require additional underwriting and payment of all missed premiums.

How long do you have to reinstate a lapsed life insurance policy?

You can generally reinstate your life insurance policy within two years of it lapsing, however, the reinstatement period varies for each life insurance company.

Insurance Expert

Nupur Gambhir

Insurance Expert

Nupur Gambhir is an insurance editor at Policygenius in New York City. Previously, she has worked in marketing and business development for travel and tech. She has a B.A. in Economics from Ohio State University.

Policygenius’ editorial content is not written by an insurance agent. It’s intended for informational purposes and should not be considered legal or financial advice. Consult a professional to learn what financial products are right for you.

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